Tag Archives: valuation

What Chinese Company is Worth 60% More Than Sohu With 1/10th the Revenue?

23 May

The company is actually worth ~57% more than Sohu with 1/9th the revenue, but rounding made for a better title.  Know what company I’m thinking of?

No?
Here’s a few more hints:

  • It’s currently trading at about 60x annualized 2011 sales (4x as rich as Linkedin’s valuation)
  • Has about 1/10th as many employees as Sohu
  • Claims to be engaged in significant research & development, but only spends 8.2% of revenue on R&D while Sohu spends 12.6%

Any guesses?

Continue reading

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Did Microsoft Overpay For Skype?

18 May

When the Valuation Doctor (literally!) says so, there is a very, very good chance the answer is “yes.”  If you don’t know who Aswath Damodaran is, you need to find out, NOW.  I would not bet against him with your account.

What is the value of Skype? The question is rendered more difficult to answer because Skype is a private business and we know little about the insides of the financial statements. It is widely reported, though, that Skype had operating losses of $7 million on revenues of $ 860 million in 2010. Taking those numbers as a base, I tried to value Skype, making what I thought were very optimistic assumptions:

– Continued revenue growth of 20% (which was what they had last year) for the next 5 years and a gradual tapering down of growth to 3% in ten years.
– A surge in pre-tax operating margins to 30% over the next ten years; this margin is at the very upper end of the technology spectrum (where companies like Google reside).
– A decline in the cost of capital from 12% now (reflecting the uncertainty associated with young, growth businesses) to a cost of capital of a mature company in ten years
With those assumptions, I estimated a value of $ 3.8 billion for Skype. It is entirely possible, however, that I am wrong on my key assumptions – revenue growth rates and target margins. In fact, changing those base inputs gives me the following table:

$3.8 billion.  Microsoft paid $8.5.  Or overpaid by 2.2x.

What we don’t know is whether any other buyers expressed interest in Skype, and if so, how much they were willing (and able) to pay, or if they even existed.  Remember, a little over a year and a half ago, Ebay sold Skype for $2.75 billion.  If we assume Microsoft paid a fair price for the acquisition, then we’re accepting that Skype has increased in value by over 200% in 18 months.  Seldom do firms grow so fast, in so little time.  If we use Damodaran’s valuation, the increase is about 38% or about 25% annualized, which sounds far more reasonable to me, even for a high-growth business.

Some have (attempted to) make the case that while the price Microsoft paid may be a little rich (to put it gently), once MSFT integrates Skype’s offerings with its existing products/services, the “synergies” and “strategic rationale” will be more than apparent.  Whether that happens is another conversation for another time, but given MSFT’s less-than-spotless history of squeezing value out of acquisitions, and to say I’m skeptical would be a bit of an understatement.  Remember Web-TV? What about Hotmail?  Anyway…

Damodaran, for his part, has this to say (generally speaking):

It has always been my contention with acquisitions that it is not the strategic fit or synergistic stories that make the difference between a good deal and a bad one, but whether you buy a company at the right price. Put in more direct terms, buying a company that is a poor strategic fit at a low price is vastly preferable to buying a company that fits like a glove at the wrong price.

Unfortunately – unless Skype’s private financials paint a different picture – it looks like MSFT may have screwed this acquisition up on both fronts…

How Much Is Donald Trump Really Worth?

29 Apr

This is a question I have never really pondered for more than 5 seconds, because frankly, I don’t care, or at least I didn’t until I read this Forbes article that explained how they go about estimating his worth.

For our upcoming Celebrities issue, FORBES estimates Donald’s licensing income to be approximately $60 million. This includes earnings from books, ties, cuff links, mattresses, speeches, Apprentice producer fees and royalties, and earnings from the Miss USA, Miss Teen USA and Miss Universe. This does not include any of the licensing deals from real estate, which we are in the process of investigating. By such estimate, Donald’s brand is worth $120 million. Note that the number will likely rise by a few hundred million when we account for his real estate licensing earnings.

I’m not going to dispute that $60 million number because again, I don’t care that much.  What I would like to dispute is how they get from $60 million/year in non-real estate licensing income to a $120 million valuation for the brand.  This is not exactly rocket science.  If you look at the $60 million as a simple stream of cash flows, pick a discount rate, and say it lasts 10 years (not totally unreasonable), and discount it back to present value, the value of the brand is around $350-$400 million.  If you jack the discount rate up to 15%, assume each successive year that his licensing revenue is going to drop by 25% (I think an extreme assumption), that annuity stream is still worth over $225 million!  Even if we only assume cash flows will last for 5 years instead of 10 (using the same, very conservative assumptions), the value of the $60 million/year comes out to over $130 million!

Where Forbes gets $120 million from $60 million/year is really beyond me.  I’m not an intellectual property valuation expert, but if I could buy all the licensing rights to The Donald’s various crap collections for $120 million – and I can’t believe I’m actually saying this – I’d jump at the chance!

This is to say nothing of his various real estate holdings and real-estate licensing income.  I’m not even going to attempt to ballpark either of those numbers, since they are not easy to find, and taking Donald’s word for it would be akin to taking ethics advice from Charles Rangel. The numbers may sound good, but they might be completely made-up.

UPDATE: A comment on Business Insider brought up that this quick back of the envelope number crunching exercise doesn’t consider taxes.  I left them out because I assume the licensing revenue comes into a corporate (or several), which is not necessarily (all) on-shore, making it difficult to estimate the effective tax rate at which the income is subject.

But, for fun, let’s give it a shot and assume the effective tax rate is 25%, and the income declines by the same amount each year, with the same assumptions mentioned above.  Using these numbers, we get a value of $126 million, still above the number used by Forbes, but only slightly.  The point is we can massage the inputs to get any output we want, and unless Forbes starts learning how to be transparent (doubtful), we can do nothing besides question their assumptions and methodology, especially when they seem suspect.

21st Century Holding Company – Time for Investors to Let Go?

11 Jan

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I have been asked several times to discuss 21st Century Holding Company (Nasdaq: TCHC) and why it trades at a such a big discount to its STATED book value. Currently, that discount stands north of 50%. Let me start by saying that TCHC is not the same company that can be seen in flashy television commercials marketing car insurance – that would be 21st Century Insurance the auto insurer which was formerly owned by AIG and sold to Farmers Insurance, a unit of Zurich Financial Services. AIG sold the business for $1.9 billion or 1.00x Tangible equity and 0.85x its stated equity. TCHC is the Florida insurance holding company which has a current market capitalization of approximately $27 million.

Promises, Promises

It has been said before: “insurance is a promise.” You and I pay insurance premiums in the expectation that, should some unwanted event occur, our insurer will be there to cover the costs. Well, what if they can’t? I often like to tell people that in the financial sector, earnings are what management says they are, until proven otherwise. The question for holders of TCHC stock is twofold: 1) does the company have enough reserves to pay current and future claimants and, if so, 2) how much, if any, equity will the company have left for shareholders? Based on the market cap of the company’s publicly traded shares, the answer is: 1) yes and 2) half of what is presented in the company’s latest Form 10Q. Continue reading

Private Equity Comeback: Goodluck, and Godspeed

23 Mar

PE Hub just did an interview with GTCR principle Phil Canfield about all sorts of fun stuff, like this impending M&A Boom that’s coming this year.  Before I get into his remarks, let’s do a quick and dirty summary of our last PE/M&A boom (Forgive the gross over generalizations and run-on-sentence):

Lazy/unqualified investors (Pensions, endowments, CLO’s, etc) seeking yield, outsourced “diligence” to the NRSRO’s, themselves hopelessly conflicted with these same investors, enabled various corporate and sponsor M&A deals, often themselves enabled not by fundamentals (or even “fundamentals”) but by “innovative financing” the details of which were often too complex for these aforementioned investors and Ratings analysts.  As this snowballed, equity prices zoomed skyward as everyone adopted a “mee-too” mentality, further adding-to the mountains of M&A/LBO debt and associated derivatives until, *shocker* it all came crashing down.  The equity, the debt, and, oh yes, the derivatives.  Anyone remember Gordian Knot?  Perhaps the most aptly-named financing vehicle in history, but I digress (and realize that’s a much larger/slightly different issue, but couldn’t help myself, shh!)

The Reformed Broker mostly echoed my expectations a few days ago, although as you’ll see, mine are a bit more harsh, another *shocker* I know.

GTCR’s Canfield cites a few reasons why he and his cohort expect a new M&A boom (these are partial summaries and my reactions.  Read the PE Hub article for his full responses):

  • Rebound in valuations: Non one wanted to sell their company at 2008 levels even though everyone wanted to buy cheap, alas, no activity.  This year, while I disagree but am not surprised to hear, acquirers and targets see more eye-to-eye on valuation.  Let me remind you, while I have no doubt there’s exceptions and good values to be had, just taking a look at the retail index and the broader incicies, really?  Check it out, that’s the past 3 years, 3/07-3/2010.  Somehow (and again, this is very 30,000′ level), were it my money at stake, I’d be VERY careful buying any company at 2007 valuations, especially consumer discretionary.

  • Availability of financing and increased liquidity.  True, high-yield issuance has recovered substantially, but, and this is what I love (but not my area of expertise so  I’ll be brief), CLO markets.  Also, he mentions the increased cash on S&P 500 companies balance sheets…Does anyone see a similar pattern starting to emerge here?
  • Oh, and the best part, the true reason (at least for sponsor-backed deal-making): half a trillion dollars of committed but uncalled capital, capital that’s only locked-up for another 2 or 3 years.

So, lets make sure we all understand what’s going on here: If PE firms don’t spend this $500bn in the next 2 or 3 years they have to give it back to investors.  I think, well, hope, even the most novice observer should realize by now that little, if any of that money will go un-spent.

Instead, PE firms are on the clock searching for deals, AFTER valuations have largely jumped back to pre-crash levels, with the same/similar kind of financing arrangments/structures that caused (at least fueld) the bubble.

What’s the saying about myopia again? “Those who fail to learn from history are doomed to repeat it?”

Ya, this will end in tears.

LP’s: I wish you the best of luck with your PE portfolio’s over the next 5-10 years.

UPDATE:

A sharp twitter follower points out (and I can’t believe I didn’t think of this myself, argh!), there is a solution for some LP’s: systems like GS TRuE.  I’m hardly an expert on unregistered securities trading, but seems like his suggestion could work…anyone care to comment?